Key Economic Commentary: China’s Black Monday Puts Stocks in Freefall

Global market turmoil had stocks in a freefall last week, as the DJIA lost over a thousand points by market close on Friday and a heavy flight-to-quality bid pushed the 10-year treasury yield down to 2.04%.

This morning, we are seeing more of the same, as stocks are significantly lower and the DJIA is down another 475 points after falling as much as 1,100 points early this morning. Investors are highly concerned about slowing growth in China combined with a devalued currency, as the Chinese Shanghai Composite Index fell 8.5% overnight to drop below the critical resistance level of 3,500 to 3,209 on continued reports of Chinese economic weakness combined with growing concern that the Chinese government does not have the necessary tools to prevent a further fall. International media is dubbing the collapse “Black Monday.”

After rising as much as 60% to start the year, the Shanghai Index is now lower for 2015. This has had a compounding effect on commodity prices as well, as the slaughter continued in that space, with oil prices falling to $37/barrel. Overseas equity prices are expected to fall further unless the People’s Bank of China quickly responds with highly accommodative policy measures, though whether or not they have the ammo needed to effectively calm investors remains to be seen. U.S. equities are currently on pace for their worst monthly performance since February 2009.

The Economic Week Ahead: New Home Sales and Home Prices Data

The U.S. economic calendar is pretty full this week, and perhaps some strong data readings will help calm markets. We didn’t have any pertinent releases today, but have important data on new home sales and home prices Tuesday, durable goods orders on Wednesday, Q2 GDP revisions and pending home sales on Thursday and reports on personal income and spending Friday.

Also of significance, Federal Reserve Vice Chairman Stanley Fischer is expected to address monetary policy and U.S. inflation when he speaks this coming Saturday in Jackson Hole, Wyoming. His speech could now very well remove September as a viable option for the Fed’s first rate hike, which would likely help U.S. equities amid the previously looming concern that a Fed rate hike was coming next month. After trading over the last couple of weeks with a higher than 75% chance that a rate increase was coming next month, Fed funds futures contracts are now trading with just over a 30% likelihood that the Fed will move next month.